“Inflation accounting”, which is expected to positively affect companies with strong equity and negatively affect companies with high financial and tangible fixed assets and indebtedness, will enter into force as of January 1, 2024, unless a new postponement decision is made. Inflation accounting is expected to have a tax-reducing effect on financial institutions.
However, Treasury and Finance Minister Mehmet Simsek’s announcement saying “we will exclude the financial sector from inflation accounting” made banks nervous. It is noted that if the banks are excluded with a law amendment, the banks may take the regulation to the Constitutional Court.
Inflation accounting, which is eagerly awaited by a significant part of the business world because it cannot fully measure its impact on its own balance sheet, will take its place in the taxation system again after 20 years if there is no last minute change.
While banks are worried that they will not benefit from the inflation accounting opportunity, the business world is anxiously awaiting the application in response to the possible increase in the tax base. The omnibus bill is expected to include technical regulations on inflation accounting as well as provisions that will exclude financial institutions from the scope. The omnibus bill is also planned to expand the scope of the taxation of income obtained through the internet.
Law is necessary for both postponement and implementation
If there is no new postponement, inflation adjustment (inflation accounting), which aims to eliminate the effects of many years of high inflation on financial statements and to eliminate inflation-induced negative effects on tax, will be applied as of January 1, 2024. However, the parties have different views on inflation accounting, the effect of which will vary on a business-by-business basis.
The legal regulation on inflation accounting was enacted in 2003 and applied for the following year. Then the requirement of “inflation exceeding 10 percent in the current year and 100 percent in the last three years combined” was established last year, but the implementation was postponed due to public pressure. That law stipulated that balance sheets should be subject to inflation adjustment without excluding any segment.
According to the information obtained by the EKONOMI daily, banks will apply to the Constitutional Court if such an amendment is made. It is stated that the reason for this application will be the violation of Article 10 of the Constitution, which regulates the principle of equality, and Article 73, which regulates tax justice.
Each business has a different situation, lobbying has begun
The business world is distant from inflation accounting, which will have a different impact on each business (tax increase or decrease) depending on external financing. Especially those whose tax burden will increase have begun to put pressure on the economic administration to postpone it again. Experts state that inflation adjustment should be handled separately for each enterprise, depending on conditions such as the use of external financing, the interest rate of the resource used, stocks, and the nature of assets.
It is emphasized that businesses do not object to the inflation adjustment since it will not have a tax effect for 2023, but the tax increase in the following years disturbs businesses. It is even stated that some lobbying efforts have started to postpone this again.
Ministry of Finance needs to be authorized
On the other hand, a new amendment to the law authorizing the Ministry of Treasury and Finance to issue communiqués is needed for the technical implementation of inflation accounting. This amendment is expected to be included in the omnibus bill currently under preparation.
“Additional tax burden on 98 percent of businesses with weak equity capital”
CPA Abdullah Tolu, one of the authors of EKONOMI daily, said that if there is no postponement or cancellation, with the inflation adjustment to be made in the 2024-2026 accounting period, 98 percent of businesses with weak equity capital and financing with debt will have an additional tax burden. Underlining that financial statements have not reflected the reality for many years, Tolu said, “Inflation adjustment will force the real sector to pay taxes on unrealized gains. The banking and finance sector is luckier than the real sector. The inflation adjustment to be made in these years reduces the corporate tax to be paid by the banking and finance sector, unlike the real sector.”
Stating that the business world has just started to realize the negative aspects of inflation adjustment and that their perspective has changed, Tolu said, “While 2% tax is levied on the value increases resulting from the revaluation regulations introduced in the last 4-5 years, 25% corporate tax will be levied on the positive differences that will arise due to inflation adjustment. This is a serious contradiction and no one wants to pay so much additional tax.”
Abdullah Tolu stated that it does not seem possible to make inflation adjustment according to the provisional Article 33 of the Tax Procedure Law and said, “There is no explanation in the provisional Article 33 on how and on which provision the 2023 adjustment will be made, and there is no reference to the main regulation, repeated 298/A. In order to eliminate this gap, a new regulation of the same nature as the provisional article 25 issued in 2003 is needed.”
Tax surprise for influencers
It is stated that the Omnibus bill will also include provisions to expand the scope of tax follow-ups for internet influencers, who have been frequently on the agenda recently. It is noted that an arrangement will be made to ensure that influencers who make comments by establishing special groups, especially on economic issues, as well as those who make subscriptions on social media, mediate product sales and have not created a tax liability for these activities, will also pay tax.
Money deposited on behalf of some of them is subject to withholding tax by banks. It is also reported that those who provide such services, including those who give lectures over the internet, will also be included in the scope. For all these groups, income above a certain exemption limit will be subject to tax.
On the other hand, the omnibus bill will also include extension provisions for some exemptions and reductions in the tax laws that will expire on December 31, 2023.